shut-down rule - firms may continue to produce even when losing money
- firm could expect to earn a profit in the future
- shutting down might be costlier than operating in the red
- product price > average economic cost of production >> firm makes a profit by producing
- assuming no sunk costs, firm should shut down when price of product falls below average total cost
- w/ sunk costs, firm should only shut down when price of product falls below average variable cost
firm short-run supply curve - shows how much firm will produce for each price
- supply curve
- part of marginal curve greater than average cost curve
- price changes >> firm changes output so that marginal cost equals price
- higher market price or higher prices for inputs may lead to upward shifts in marginal cost and
market short-run supply curve - sum of all firm supply curves in the market
- overall prices changes can make adding firm supply curves more difficult
- higher prices >> firms expand output >> demand of inputs increase >> prices of inputs could increase >> firms would then decrease output
- market supply curve might not be as responsive
- Es = (DQ/Q) / (DP/P)
- perfectly inelastic supply - greater output only possible by building new plants
- perfectly elastic supply - when marginal costs are constant
- producer surplus - difference between revenue and variable cost
- surplus = R - VC = profit + FC
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